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Fair and Square Economy: the Islamic Economic Model

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Other economic models exist aside from what we’re used to. Islamic finance is one of the important points of economic development globally, and in the Islamic economy, business and banking practices are cognate to the ways of the Quran.

This economic model follows the framework of Islamic Law, which requires banking products, financial instruments, and financial services that are specific to Islamic Laws. An example of this is an Islamic account, which is different from a regular bank account.

There has been an increased interest in studying the Islamic economy, and there are practical applications that even non-Muslims can learn from Islamic Finance. In this article, you’ll find basic knowledge and information about Islamic finance and how these practices ensure fair dealings between the parties concerned.

Concept of Money, Lending Funds, and Managing Risks

Islamic economics follow the rules and laws of Sharia and “Siraat al-Mustaqim,” meaning “Direct and True Path.” As such, the principles of this particular economic model are based on the exposition of the distinctive elements of Islamic doctrine; understanding how it works requires the knowledge of the principles of Islamic law, also referred to as Sharia Law. In essence, Sharia law focuses on regulating the behavior of citizens and a prescribed way of life, as well as solving doctrine and religious issues. It is guided by the Islamic concept of money and capital.

In Sharia law, money has no intrinsic value; it is merely a unit of measurement and a medium of exchange. This concept is completely different from the typical capitalistic economic models we know today and still largely followed.

Sharia law is particular about accountability, responsibility, and proportion of profits and risks. This extends to the way they manage their financial obligations and responsibilities, as well as managing risks.

While these practices sound rigid and limiting, they involve the fair and proper allocation of scarce resources without restraining personal freedom and negatively impacting the ecological and economic environment. This is put into practice in zakat and riba.

Riba is one of the basic prohibitions based on Islamic financing and the requirements of Sharia. This means collecting or paying interest on loans is not allowed by the law.

To mitigate the risks of lending and borrowing funds, transactions are insured by several parties sharing risk on a cooperative basis. Individuals and financial institutions have a social responsibility towards each other to maintain fair trade on both sides. No one party gets more or less than any of the parties involved in a transaction or a contract.

sales and costs chart

Transparency and Stability

Seeing how the pandemic has affected the world, various financial institutions have decided to give businesses a much-needed financial break.

This means loan payments are put on hold until further notice. However, we are used to pre-pandemic lending practices, where high interest rates normally come with the package — interest rates are negotiable but remain completely inescapable. It makes it more difficult for borrowers to find participants to act as guarantors in the loan and are left to find ways to pay off their dues on their own in case they encounter a financial setback. Without people sharing risk with a borrower, there is a higher tendency of defaulting on the loan and accruing even more interest along the way.

This has been the case in many countries that follow a capitalist economic model. Loan security has been a common challenge in many financial institutions. It’s a toxic financial cycle that leaves lenders running after their funds as the borrower loses financial credibility. At worst, both parties come up on the losing end.

Over the years, Sharia-compliant financial assets have constantly challenged conventional banking and regulators of predatory financial practices in a capitalist economy. Sharia compliance propels economic justice, fair wealth distribution, and property rights. Their contracts are transparent and leave no room for deceptive financial tricks and excessive interest rates on loans.

This is why the Islamic economy continues to grow and remains stable despite the current global economic climate.

Seeing how different the Islamic financial concept is from what we know, it’s clear why a huge number of financial institutions around the world have begun adopting and applying Sharia-based principles whenever possible and applicable.

Working towards a meaningful and healthy relationship between financial institutions and the clients is possible through transparency, honesty, and a more comprehensive way of insuring loans. This way, both parties are protected against loss and guarantee that issues will be resolved in the best and fairest way possible.

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